Wednesday, April 2, 2008

“What to do about a country that isn’t prepared to participate adequately in its own rescue?” Robert Rubin, writing about the Russia of 1998 in his book “In An Uncertain World”.

All of the candidates for President of the United States are out talking with the people and describing to them the policies and programs they would like to enact if they are elected this November. The basic question that follows this ‘dance’ is, “What are the chances that this person, if elected President, would be able to carry through and implement these policies and programs?”

Right now, my answer to this question is “Little or none!” Until the current financial dislocation resolves itself and the new administration really gets serious about the strength of the United States dollar, the hands of the new President will be tied in terms of enacting new programs and policies. The situation is similar to the one faced by Bill Clinton when he became President in 1992. The Republicans had had control of the White House for twenty of the previous twenty-four years and so Democrats were very anxious to get back into the White House and enact some programs and policies that were more consistent with their way of thinking. However, this was not to be.

Fortunately, for the United States, President Clinton listened to Bob Rubin who advised him that the Federal Budget had to be brought under control and then kept under control. The reason being, Rubin argued, was that any whiff of fiscal irresponsibility on the part of the Democratic administration would be jumped upon by the international financial markets and the dollar would suffer the consequences. New programs and policies would have to be limited while the administration brought their fiscal budget into balance.

The result of this was eight years of almost continuous prosperity and growth for the United States economy and strength for the value of the dollar. Granted that the Clinton administration had received the gift of a tax increase on the part of the George H. W. Bush administration, a gift that helped propel Clinton into the White House, but this gift set the stage for the eight good years that followed. [Clinton DID return a gift to Bush 43 reciprocating the gift that had been given him by Bush 41: the form of the gift was a balanced federal budget and, in general, a very robust economy. Bush 43 has not been so generous to the President that will follow him.] But, prudent fiscal discipline and management also made a major contributed to this period of growth and prosperity.

In one sense, however, the new President that will follow Bush 43 is in a similar situation to the one faced by Clinton. The dollar has been declining for about six years. The environment created by the Bush administration over the past seven years is one that includes a lack of discipline and prudence with respect to risk management and has left financial markets and institutions in disarray. One of the first items on the agenda of the new President will be to restore confidence in the United States government and the United States financial system. This agenda item will affect all else that the President does.

What about the war in Iraq? Well, no new President may be able to take the United States out of Iraq in the near term. However, anything that is done there…and in Afghanistan… is going to be severely limited by what can be done within the budget constraints that will need to be honored.

What about health care…universal or not? Again, budget constraints may not allow anything of consequence to be enacted.

What about….? Same story…

Well, if this is the case, how long must the budget constraints be imposed? It took PresidentClinton almost his whole term to bring the Federal budget under control. And, what is very important along the way…the new administration must not only show its intent to bring the budget under control, everything it does must reinforce the image that it is moving in this direction. The international financial markets will not just respond positively to talk or weak actions on the part of the new leaders. ‘Tweaking’ won’t do it. The crucial thing here is the confidence the world has that the new President and the leaders within the new administration are firmly committed to successfully pursuing such a policy. This confidence is hard to come by and if it is abused at all, the confidence will go away and be just that much harder to re-establish.

The candidates for the Presidency must be very careful on this. They have at least two audiences. The first is, of course, the American public. These candidates must convince the electorate that they are capable of being the President and will bring to that office a vision that the American people can buy into. Second, however, the candidates are being closely scrutinized by the world community. In the past eight years, the Bush administration has followed a relatively unilateral economic policy (as well as a relatively unilateral foreign policy). This world community is trying to determine just how much these candidates, as a President, will play by the rules of the international financial markets. This is what will make it so hard on the candidates to conduct an honest, yet positive campaign into the fall.

What these two audiences want to hear are in many instances contradictory. The American public wants to know what the candidates would like to enact if they are elected President. The international financial community wants to know whether or not the new President will bring discipline and responsibility to the creation and management of economic policy. If I am right about the concern over the undisciplined fiscal and monetary policy of the United States government, this will mean that the American public will not get what it wants…at least for an extended period of time.

I just hope that the next President of the United States will surround him- or herself with advisors of the caliber and independence of Robert Rubin. Then I hope that this President will have the wisdom to listen to their arguments and then act in the best interest of all Americans. There are many times when pragmatism should win over ideology…this is one of them!

About Me

Professional history:
Banking--President and CEO of two publically traded financial institutions; Executive Vice President and CFO of another.
Academic--Professor at Penn State University and at the Finance Department, Wharton School, University of Pennsylvania.
Government--Special Assistant to Secretary George Romney at Department of Housing and Urban Development; Senior Economist in Federal Reserve System.
Entrepreneurial--work in venture capital and other private equity; work with young entrepreneurs in urban environment.